US Dollar Index trades vulnerably near 98.40 on hopes of US-Iran second round of talks

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The US Dollar (USD) holds onto its Monday’s losses amid optimism that the United States (US) and Iran are still in favor of a permanent ceasefire despite the absence of a breakthrough in the first round of talks in Pakistan during the weekend.

The US Dollar clings to Monday’s losses on US-Iran permanent ceasefire optimism.
US VP Vance called negotiations with Iran “productive”.
Traders do not see the Fed hiking interest rates this year amid US-Iran optimism.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat near 99.37, which is the lowest level seen in over six weeks.

Earlier in the day, US Vice President (VP) JD Vance stated in an interview with Fox News that the meeting with Iranian delegates was not a complete failure, but was “productive”, as his team gained “valuable insight into Iran’s negotiating approach”. Vance expressed confidence in a potential second round of negotiations, stating,” Momentum has been established, with the ball in Iran’s court to advance negotiations further.”

Meanwhile, a report from CNN has also stated that officials from Washington are internally discussing details for a potential second, in-person meeting with Iranian officials before a ceasefire expires on April 21.

On the domestic front, traders have completely priced out the possibility of an interest rate hike by the Federal Reserve (Fed), following the decline in the oil price amid US-Iran optimism, have also weighed on the US Dollar.

In Tuesday’s session, investors will focus on the US Producer Price Index (PPI) data for March, which will be published at 12:30 GMT.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.